FA Module 11 Debt amortization practice exam questions

covering interest expense, amortization of premium, accrual of discount, carrying value, yield to maturity,

(The attached PDF file has better formatting.)

A firm issues a five year 4% annual coupon 100,000 par value bond on December 31, 20X1. The interest expense on the bond in 20X6 is 4,501. The firm reports under IFRS.

Question 11.1: Interest paid

What is the interest paid in 20X6?

Answer 11.1: 4% × 100,000 = 4,000

(interest paid = par value × coupon rate)


Question 11.2: Accrual of discount or amortization of premium

What is the amortization of premium (accrual of discount) in 20X6?

Answer 11.2: 4,000 – 4,501 = (501)

(amortization of premium = interest paid – interest expense)


Question 11.3: Carrying value

What is the carrying value of the bond on December 31, 20X5?

Answer 11.3: 100,000 – 501 = 99,499

(carrying value at the end of the year = carrying value at the beginning of the year – amortization of premium or + accrual of discount)


Question 11.4: Yield to maturity

What is the yield to maturity on December 31, 20X1?

Answer 11.4: 4,501 / 99,499 = 4.5237%

(yield to maturity (constant in all years) = interest expense / carrying value at the beginning of the year)


Question 11.5: Sale price

What is the sale price of the bond on December 31, 20X1?

Answer 11.5:

4,000 × (1.045237–1 + 1.045237–2 + 1.045237–3 + 1.045237–4) + 104,000 × 1.045237–5 = 97,702.49

(sale price = present value of future cash flows)